Silicon Implant

January 27, 2011

Can Dmitri Medvedev create a Russian Silicon Valley?

When Dmitri Medvedev became Russia’s president in 2008, he projected a very different image from that of his predecessor. Vladimir Putin is a buff former KGB agent who is fond of rugged pursuits, such as hunting and fishing, and is frequently photographed engaged in them without his shirt on. Medvedev is an elfin St. Petersburg-trained lawyer who enjoys chess and photography, practices yoga daily, and is the proud owner of the complete recordings of Deep Purple on vinyl. Where Putin’s economic vision seemed to consist solely of the crass exercise of Russia’s petro-power, Medvedev has called for the country to encourage entrepreneurship and compete with the West.

In that spirit, last summer, Medvedev made a pilgrimage to Silicon Valley. (Putin was busy attending a bikers’ rally in the Ukraine, where he showed up astride a gigantic Harley Davidson.) For Medvedev, who is a keen technology enthusiast, the trip was more like a vacation than a state visit. Ditching his necktie and donning blue jeans, he soaked up San Francisco’s charms, observing, “It must be hard to work in such a city where you would always be wanting to look around and relax.” Apple CEO Steve Jobs gave him an iPhone4, and he bonded with then-Governor Arnold Schwarzenegger over discussions of Russian bodybuilders and the 1988 cold war buddy-cop movie Red Heat. In keeping with his vow to improve government transparency, Medvedev recorded his impressions of the trip on his LiveJournal blog. He also opened a Twitter account (inaugural tweet: “Hello, I am on Twitter and this is my first message”), which, the Kremlin duly announced, would receive “round-the-clock support from a special editorial team of several people.”

Medvedev had traveled to Palo Alto to promote what is perhaps the signature initiative of his presidency: a Russian version of Silicon Valley, which will take the form of a brand-new city, located near Moscow, and which Medvedev hopes will kick-start the country’s knowledge economy. However, he explained to officials at Stanford University, most Russian entrepreneurs were reluctant to finance this sort of project. “Venture capitalism is not going so well,” he confessed. “No one wants to run the risk.” By coming to California, Medvedev hoped to enlist the Valley’s best minds in the effort.

So far, the Valley has been supportive. Google CEO Eric Schmidt has signed on as an adviser, as has Craig Barrett, the former CEO of Intel Corp., while Cisco Systems, the global communications giant, has pledged to make the development a “smart-connected” city. A few months after Medvedev’s visit, Schwarzenegger arrived in Moscow with a delegation of potential investors—executives representing some two-dozen companies from his home state, including Oracle Chairman Jeffrey Henley. Medvedev, in a black leather jacket, took Schwarzenegger for a tour of the site, where the irrepressible Arnold hailed the Russian president as a “great visionary” and declared, “It’s almost like looking at a gold or diamond mine and saying, ‘All you got to do is go in there and get it.’”

The reality, though, is a little more complicated. For all Medvedev’s cosmopolitan leanings, he is still what Russians call a gosudardsnik, a man of the state. (He was, after all, Putin’s favored protégé.) I met him three years ago, when Putin was still president and Medvedev was the first deputy prime minister. We sat in his office in the Kremlin, and he sketched for me on a notepad a triangle, with the political elite, the business elite, and the cultural elite represented at each point. These three forces must be in harmony, he told me, because, when they are in opposition, “this resulted in revolutions and economic and political collapse.” Recently, I thought of this philosophy—so alien to Western entrepreneurial culture—while watching Medvedev forge ahead with his quest to build a hub of creative thinking within a corruption-riddled, bureaucracy-loving, authoritarian state. Which side of his personality would come to define this venture: the technophile or the bureaucrat?

During the Putin era, oil and gas were the salvation of Russia, rescuing the country from a deep recession. Today, hydrocarbons account for about 30 percent of direct foreign investment and 20 percent of GDP (investment in science, by contrast, only constitutes 1.5 percent). Recent events, however, have exposed the risks and the limits of Russia’s neartotal economic dependence on its natural resources. The other developing powerhouses—that is, China, India, and Brazil—all have more diverse economies and weathered the global downturn in far better shape than Russia, which was hit hard by the drop in oil prices. Its economy contracted by about 8 percent in 2009, making it one of the biggest casualties of the recession.

There have been other indignities, too: In 2010, Russia had to stomach the news that the Nobel Prize for physics had been awarded jointly to a pair of Russian scientists, Andrei Geim and Konstantin Novoselov, who began their careers in their homeland but conducted their groundbreaking experiments abroad. That year brought another high-profile—if less prestigious—snub: Andrei Ternovskiy, who created the wildly popular webcam site Chatroulette.com when he was 17 years old, ditched Russia for Palo Alto, telling The New Yorker, “My perfect plan is that I don’t ever return.” Ternikovskiy joined around half a million Russian-speaking people living on the West Coast of the United States, many of them Bay Area mathematicians, programmers, and engineers.

In the hope of reversing that trend, Medvedev made “modernization” a watchword of his presidency from the beginning. Then, in late 2009, he issued a decree forming a “working group for creation of a detached territorial complex for research and development and further commercialization of the results.” In early 2010, details about the new city began to emerge. Residents would be carefully chosen by a Kremlinsanctioned committee of specialists and would focus on five research priorities identified by the president: energy efficiency, information technology, telecommunications, biomedical research, and nuclear technology. The Kremlin has allotted $500 million to the initiative this year and up to $6.6 billion over the next three to five years (the total could ultimately reach tens of billions of dollars, one well-connected insider told me). After some debate, it was declared that the development would be called Innograd, or Innovation City.

Innograd will be constructed near the woodsy village of Skolkovo, about twelve miles west of Moscow. The site, much of which previously belonged to a government agricultural agency, does not immediately call to mind either the balmy temperatures of Palo Alto or the rebellious spirit of 1960s California that produced a generation of entrepreneurs like Steve Jobs. The locale is nondescript, dotted with pine forests and weekend-retreat dachas built by wealthy Moscovites. Two architectural firms are competing for the Innograd contract—OMA, founded by the Dutch architect Rem Koolhaas, and arep of France. For now, however, the project website contains only assorted photos of commendable urban- and scientific-development projects—such as the Chelsea High Line in New York and the Purdue Research Park in Indiana—and vague pronouncements on desirable design principles, such as: “As world experience has shown, wooden house building is considered one of the most convenient, inexpensive, and eco-friendly housing technologies.” There will be new housing for 25,000 to 30,000 people, new schools, new sports grounds, new hospitals, a new legal regime, a new tax and customs system, and even a specially created police force—as if the import of anything from elsewhere in Russia would be a noxious contaminant.

To direct the city’s development, Medvedev tapped Viktor Vekselberg, a 53-year-old billionaire (he is also, incidentally, the owner of the world’s largest collection of Fabergé eggs). I spent a few hours with Vekselberg aboard his private jet in 2001. Vekselberg made his fortune in the post-Soviet era from oil and other commodities, and he was returning to Moscow from the Siberian oil region. I found him to be a gracious host and, unlike many Russian businessmen, plainly at ease with foreigners. We toasted each other with vodka shots and nibbled from a bowl of black caviar. The meeting was distinctly more civilized than some of my other encounters with Russian oligarchs during the early years of the Putin regime. (There was, for instance, the evening I spent at the palatial estate of a pharmaceuticals magnate who bragged about the price of his Persian rug—$2,500 per square meter—while eating roast suckling pig from a Bernadotte porcelain dinner plate with his fingers.)

Yet, although Vekselberg may be a more respectable kind of oligarch, he is still an oligarch. In fact, a number of Innograd’s advisers who have been charged with creating Russia’s new economy happen to be the same people who shaped and profited from Russia’s old economy. They include Anatoly Chubais, the head of the State Nanotechnology Corp., or RUSNANO, who won a reputation as a radical free-marketeer during the Yeltsin era but has since accommodated himself to the state-centric capitalism of the PutinMedvedev years, and Vagit Alekperov, chief of the Russian oil giant Lukoil and a deputy energy minister in Soviet times. According to documents obtained by the Russian newspaper Vedomosti, the government may need to buy additional land for Innograd from the billionaire Roman Abramovich, owner of the Chelsea Football Club in England and yet another oil tycoon with close ties to the Kremlin.

Perhaps the most caustic critic of the Innograd project is William Browder, a Chicago-born investment-fund manager who formerly ranked among Russia’s biggest foreign investors. In 2005, he was returning to Russia when he was stopped at the airport and denied entry to the country. Interior Ministry officials raided his Moscow offices, and his lawyer, Sergei Magnitsky, who had suspected the authorities of a plot to steal the assets of Browder’s company, was arrested and jailed. Magnitsky was held for eleven months in pre-trial detention, where he suffered from health ailments including abdominal pains and vomiting—possibly a sign of acute pancreatitis. He died in a Moscow prison in 2009. (Putin has denied knowledge of “who this Mr. Browder is,” while Russian authorities allege that Browder’s lawyer was the one attempting to scam the state.) “I have to feel a little sorry for the good-hearted technology executives who are being wooed to take part in [the Innograd] project,” says Browder, who is now a British citizen and lives in London. “I’m sure they have no idea, even in their wildest imaginations, how pervasive the danger, corruption, and criminality are in Russia. If these people were able to see even five percent of what I’ve experienced in Russia, they would run so fast from this invitation, it would make the Russians’ heads spin.”

Given this context, I was curious to learn why companies like Google have been so quick to lend their credibility to Innograd. However, Google declined to say how much money, if any, it had committed to the project, and Eric Schmidt (who will step down as CEO in April and become the company’s executive chairman) refused a request for an interview. Instead, a spokesperson e-mailed me a Schmidt-approved comment, which read, in part, “We support the goal of Russian officials to spur the innovation economy. ... The original Silicon Valley relies on a business-friendly legal environment, encouraging venture capitalists to invest, a free flow of ideas and putting in place the right physical infrastructure. We trust that this is also the intention of the Russian government.”

All of which says, well, not much. Bernard Sucher, an American-born financier who has long worked and invested in Russia, offered a plausible explanation for why the Googles of the world are embracing Innograd—not because it represents a gold mine, but because U.S. and European companies are seeking a larger foothold in the Russian information and technology market. The prudent step, therefore, is to pledge some form of participation, as Microsoft, Boeing, Nokia, and Siemens have also done. “If the Russian government says, ‘This is important,’ you have to take notice if you want to be an important player in the country,” says Sucher. “It’s not like it costs you capital or serious expense to become part of the conversation in Skolkovo.”

Google also declined to respond to a question about why its Russian-born co-founder, Sergey Brin, does not appear to be involved with the Innograd venture. Brin moved to the United States with his family at the age of six in 1979, and went on to study computer science at Stanford. He is not known to have warm feelings toward the land of his birth; he once memorably described it as “Nigeria with snow.”

For all the futuristic aspirations surrounding Innograd, there is one thing about it that is very familiar indeed: the peculiarly Russian obsession with the novy mir,the new world. The country’s history is littered with grandiose attempts to transcend the daily disillusionment of malfunctioning elevators, constipated bureaucracies, and tenement hallways that reek of stale cabbage. During the Soviet years, the Bolsheviks destroyed all vestiges of the old in order to forcibly create the Kremlin-blessed new. But the tradition is as old as Czar Peter’s invention of a new Russian imperial capital in the early eighteenth century—a “Venice of the North” on the banks of the Neva River, intended to turn the Russian mind away from provincial Moscow and prod it in the direction of cosmopolitan Europe.

In that light, the Kremlin’s decision to locate Innograd at Moscow’s doorstep is telling. No place in Russia is more obeisant to authority than the greater Moscow area that encompasses Skolkovo. A Russian high-tech hotbed could conceivably be located almost anywhere in the vastness of Russia—after all, Silicon Valley is situated, happily for its residents, some 3,000 miles from Washington, D.C. St. Petersburg, Russia’s most progressive, Western-oriented metropolis, would have been a far better choice. For that matter, so would anywhere in Siberia.

Medvedev is not unaware of the limitations of a command-and-control approach to fostering innovation. “Ideally, Skolkovo should become a system that entices people, a place where one wants to go, that absorbs like a sponge, and this cannot be done by an order,” he observed during his visit to Silicon Valley. So why has he been so personally involved in Innograd’s creation? The cynical theory is that Team Medvedev is establishing inviolable claims on the budget—a Kremlin tradition known as amassing “administrative resources”—so that he and his cronies will be set for life. It’s also possible that Medvedev has embraced Skolkovo as a means of establishing his own political identity. Putin is still seen as the country’s most powerful figure and, as widespread rumor has it, may seek to return to the presidency in 2012. (True to form, Putin has showed little interest in Innograd, instead adopting the 2014 Sochi Winter Olympics as his preferred national greatness project.)

But a more straightforward explanation of Medvedev’s motives sounds right to me. Both native Russians and Western expats who are sympathetic to Medvedev believe that he is genuinely captivated by the project—he’s constantly talking about it to the Russian press—and is convinced that no other route to building an innovation economy will work. Nikolai Zlobin, the director of the Russia and Eurasia Project at the World Security Institute in Washington, told me, “I’ve talked to him, I’ve talked to people around him—his idea is that if we cannot change Russia completely, let’s start with this place.”

The Medvedev camp apparently even has a specific historical parallel in mind—Nemetskaya Sloboda, the so-called German suburb of well-educated foreigners from throughout Western Europe that existed in Peter’s time as a separate town just three miles from the Kremlin. As a young czar, Peter spent hours there, talking and drinking with the inhabitants (he also took one as his mistress) in an effort to imbibe all he could from the representatives of a civilization he recognized as far ahead of Russia. In a similar spirit, perhaps Medvedev will make Innograd his second home. As Zlobin quipped, “Medvedev would like to serve in two capacities—as president of Russia and mayor of Skolkovo.”

Paul Starobin, a former Moscow bureau chief for BusinessWeek, is the author of Five Roads to the Future: Power in the Next Global Age. This article ran in the February 17, 2011, issue of the magazine.